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Hello Mr Moffat,
I just got one confusion, regarding capital allowance, assume we have a project of 5 years, and the company could claim First year allowance on qualifying expenditure. However the co tax payment is 12 months after they arise. So my question is when calculating the capital allowance should we calculate based on 6 years or 5 years, assuming we also have resudual value of the machine.
It it is a 5 year project then there will be 5 calculations (FYA for the first, then writing down allowance for the next 3 years, and then a balancing allowance or balancing charge for the 5th).
If the tax is 12 months delayed then the benefit of the allowances will be at times 2 to 6.
Suppose we do writing down allowance for the other 4 years and calculate the balancing allowance on the 5th year, is it correct?
Usually it would be writing down allowance for the first 4 years and then balancing allowance (or charge) in the 5th year.
But if there is first year allowance for the first year, then you don’t get writing down allowance in that year as well – so the writing down allowance will only be in the middle three years.
Hello Mr Moffat,
Sir am still kind of confused regarding capital allowance, kindly correct me if am wrong in this example.
Suppose we are given a project of 5 years. Intial investment is 800k with a residual value after 5 years is 40k. 50% first year allowance followed by writing down allowance of 40% applied on reducing balance basis. Tax payment, tax credit and charges will be paid or received 12 months after they arise. Tax 30%Year 0 800k
X1 (400) × 30% 120
————-
400
X2 (160)× 30% 48
—————
240
X3 (96) × 30% 28.8
—————
144
X4 (58)× 30% 17.4
————-
86
X5 (40)
————–
46 × 30% 14My main concern was regarding the tax on arrears, Since there would be a tax charge upto year x6, would there be any capital allowance on year x6? Or its only upto year x5.
Thanks
Your calculations are correct, and there are 5 computations.
If the tax is one year in arrears, then the first saving of 120 is at time 2, and the last saving of 14 is at time 6.
(Had there been no delay in tax, then the first saving would have been at time 1 and the last saving at time 5)
Sir,
with reference to the above. I am afraid the thing is still not clear.
as per my understanding.
assume we have a project of 5 years, and the company could claim / eligible for 50% First year allowance on qualifying expenditure followed by writing down allowance of 40% applied on reducing balance basis. Tax payment, tax credit and charges will be paid or received 12 months after they arise. i.e. on year tax delay. Tax 30%
Initial investment is 800k with a residual value after 5 years is 40k.
Year 0 800k
allowance X0 (400) × 30% 120 tax timing Year 1
————-
400
allowance X1 (160)× 30% 48 tax timing Year 2
—————
240
allowance X2 (96) × 30% 28.8 tax timing Year 3
—————
144
allowance X3 (57.6)× 30% 17.3 tax timing Year 4
————-
86.4
allowance X4 (34.6) tax timing Year 5
————–
51.8proceeds at year5 (40)
___________________
at yr 5 B/A 11.8 tax timing Year 6the above is the tax on arrears, thats why B/A time is at year 6.
Sir, if tax not in arrears, then if statement explicitly written as:
” the company could claim / eligible for 50% First year allowance on qualifying expenditure followed by writing down allowance of 40% applied on reducing balance basis”.Does this mean FYA allowance is in year 0 and tax timing year is also 0.
then after the reduced amount we claim the WDA of 40% in year 1 and tax timing year is also 1.
Further, if statement written as:
“Tax allowable depreciation is available on the plant and machinery at 50% in the first year, followed by 40% per year thereafter on a reducing balance basis. A balancing adjustment is available in the year the plant and machinery is sold.” NO tax delay.
Sir, this means that it is just a simple that in first year we take 50% and tax timing is Yr 1also
then after the reduced amount we claim the WDA of 40% in year 2 and tax timing year is also 2.Kindly clarify my understanding. I will be grateful of yours.
I don’t know why you have changed the calculations that you wrote down before – they were correct!
There is no such thing as ‘year 0’.
Time 0 is one point in time – it is the start of the first year.
The calculation of the first allowance takes place at the end of the first year, which is time 1.If there is a one year delay in the payment of tax then the affect is one year after it is calculated which is time 2.
If the project last 5 years, then there are 5 calculations (FYA in the first year; 3 years of WDA; and then balancing allowance/charge in the last year).
The tax effects on these allowances (if there is a one-year tax delay) occur from time 2 to time 6.
hi I have a qn in relation to the CAPEX in NPV calculation.
If the initial investment is 6750k. Useful life 3 yrs and residual value 250K.
Will the correct calculation be 6750K/3y or the residual value must be taken away?
Thank you
LucieCapital allowances are normally calculated in the exam on a reducing balance basis (just as in real life).
If the question did say to calculate it on a straight line basis, then strictly there will be a writing down allowance of 6750/3 for each of the first two years and then a balancing allowance in the final year. However, the examiner does allow you to have a writing down allowance of
(6750 – 250) / 3 for each of the first two years, and then a balancing allowance in the final year. Either approach gets full marks.However, again, almost always in the exam they will be calculated on a reducing balance basis in which case we never subtract the 250 at the start.
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